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Since New Delhi decided to allow foreign airlines to own stakes in Indian domestic carriers 17 months ago, Etihad, AirAsia and Singapore Airlines have unveiled plans to capitalise on what they see as the untapped potential of India’s aviation industry.
Indian entrepreneurs are also hoping for a slice of the action. An Andhra Pradesh-based private carrier, Air Costa, began operating in October and two more aim to lift off soon.
Entrants face a bumpy ride. Operating costs are among the world’s highest and potential passengers are very price sensitive. In 2012, this combination forced Kingfisher Airlines, owned by Indian liquor baron Vijay Mallya, out of the skies. Most remaining Indian carriers are lossmakers and the industry has a combined debt burden of about $20bn.
Analysts are not expecting a substantive improvement quickly. Kapil Kaul, chief executive for south Asia of the Centre for Asia Pacific Aviation (Capa), says: “The domestic airline business in India is not viable. Luckily, we have [owners] who are very brave and continue to absorb massive losses and keep the system alive structurally.”
India’s domestic airline industry has huge potential; just 61m domestic flights were taken last year by a population of 1.3bn.
But local airlines are weighed down by policies rooted in New Delhi’s old socialist-era vision of flying as an elite luxury, rather than as an essential building block of a modern economy.
States still subject jet fuel to punitive taxes as high as 30 per cent, making prices among the world’s highest. Airport charges are also high, as infrastructure developers finance glittering airports after years of delay.
Indians have shown themselves to be highly sensitive to even small fare increases. This makes it hard for carriers when fuel costs rise or the rupee depreciates.
Pressures on carriers have been exacerbated by Air India, the unpopular, lossmaking state-owned airline, which has been kept aloft by a seemingly endless flow of taxpayer funds.
The state carrier has long been a highly aggressive – and many argue, deeply distorting – competitor. It slashes fares to discomfit rivals, even as it loses money, and is unable to pay its bills and sometimes staff salaries.
The grounding of Kingfisher Airlines brought some relief in reducing capacity and increasing pricing power. Carriers have since been hit by the depreciation of the rupee, which has once again put pressure on costs.
The picture is not improving. Capa estimates that India’s carriers – led by Air India and Jet Airways, India’s second-largest private airline by market share – lost a combined $500m from September to December. This is normally one of the two best quarters for an industry with extreme seasonal fluctuations.
“When the industry is reporting losses in peak season,” reported Capa, “it is clear the domestic Indian aviation industry has a fundamental problem.”
IndiGo, India’s largest domestic airline, which carries some 30 per cent of domestic passengers, is the main exception to this dismal picture, managing to report steady profits.
However, competitive pressure in the market is expected to intensify in the months ahead. Etihad, the Abu Dhabi state carrier, has invested $380m for a 24 per cent stake in Jet Airways.
AirAsia, the Malaysia-based low-cost carrier, and Singapore Airlines are setting up Indian carriers. Both will have the Tata group, the powerful Mumbai conglomerate, as their partner.
Analysts say these foreign carriers have a strong rationale for venturing into India’s domestic market, which will help them steer more of the growing number of Indians flying abroad on to their own international networks.
Further Indian players are plunging into the fray. Aside from Air Costa, which was started by a Vijayawada-based real estate group, Air Pegasus, owned by a Bangalore-based ground-handling company, is due to start flying regional routes in the coming months. A charter airline, Air One, is also seeking a licence to start a scheduled service.
Such launches might reap a good reward. Amber Dubey, partner and head of aerospace at KPMG, the consultancy, says India still has dozens of small cities with airports that have no regular flights – which is a potentially huge untapped market for carriers with aircraft of less than 100 seats.
“There are opportunities in certain locations,” Mr Dubey says. “With reduced airport charges, tax rebates on jet fuel, and local government support, this opportunity is likely to grow over the next two years.”